We should not see the development of the value sector as a recessionary or “cyclical” phenomenon.
Has it been a good recession for value retailers? In clothing yes: value players have grown from 24% to 27% of the market over the past two years, and Primark, Matalan, New Look, TK Maxx and the supermarkets have all benefited.
We should not see the development of the value sector as a recessionary or “cyclical” phenomenon. Consumers are being thrifty because of worries about job security, taxes, interest rates and debt.
But this is not simple “trading down”. Savvier consumers are becoming more discriminating about where they spend. They economise on beauty products to save for holidays and reshape the grocery budget to offset food inflation. As they hunt for value, they trade up for small indulgences to compensate for trading down for everyday commodities. This isn’t a sacrifice, it is trading smarter.
The value retailers are meeting the need. These are not the end-of-line, clearance merchants of the past. They have honed every element of the business system and targeted the consumer proposition strictly at superior value. The famous mirrorless toilets installed at Aldi to minimise staff downtime are examples of a mindset that creates formidable and sustainable cost advantage versus mid-market retailers.
Polarised spending has been a long-standing trend, but the triple whammy of a recession, the development of a sophisticated value sector and the price-transparency of the internet has massively accelerated it.
Don’t expect it to slow down, even if and when consumer spending power returns. Just as low-cost airlines opened up a new market for short breaks, value retailers are creating new consumption occasions and growing demand rather than just sucking value out of the market.
How should mainstream retailers respond? The grocers show the way - developing their own value ranges has been remarkably successful, allowing customers to manage their spending mix without leaving the store. Mid-market apparel retailers have not been nearly as responsive to the insurgents.
So the biggest issue for value retailers is not that customers will trade back up to the mid-market when they have more money - they won’t. It is that the value sector itself is an unforgiving, increasingly scale-intensive, and rapidly internationalising arena.
In clothing, Kiabi and Takko are expanding across the continent and building scale, with New Look and Primark heading across the channel to take them on. Small and weak players that don’t hit the value spot, such as Ethel Austin and MK One, are going to the wall.
The biggest threat to value retailers lies in the endless cycle of creative destruction. Today’s value players may become tomorrow’s mid-market incumbents. Somewhere out there a new entrant is about to discover a still leaner model aimed even more aggressively at the lowest price point.
Michael Jary worldwide managing partner, OC&C Strategy Consultants